Parent-Subsidiary Liability Within the Scope of Foreign Corrupt Practices Act
Traditionally, with an aim to prevent corrupt practices internationally, pursuant to the Foreign Corrupt Practices Act (“FCPA”), offering anything of value to foreign public officials while performing their duties in order to gain commercial advantages are prohibited. Having said that, the FCPA has an extremely wide jurisdiction; that is to say, the relevant provisions and sanctions of the FCPA include all companies traded on the US Stock Exchange regardless of their origin, U.S. citizens or legal entities or subsidiaries of U.S. origin, and any real person or legal entity who offers a bribe to foreign public officials within the U.S. borders. In this framework, the principles of corporate liability regarding legal entities that fall into one of the said groups shall be applied and, in certain cases, parent companies may also be held accountable for the actions of their subsidiaries. To that end and as observed from sample cases, the U.S. authorities evaluate whether the parent company has control over the subsidiary and knowledge with regard to the infringing activities in such cases. If the answers to both of these questions are in the affirmative, the parent company is usually held accountable for the actions of its subsidiary and, therefore, faces civil and criminal liabilities for violating the provisions of the FCPA, although it may have no actual knowledge regarding the violation.
The Scope of Parent-Subsidiary Liability
Firstly, it should be stated that the application of FCPA depends on the fulfillment of certain conditions. To that end, (i) bribery must be intended to gain a business advantage, (ii) the related payment or offer must be made to a foreign public official with corrupt purposes, and (iii) the offer in question must relate to something valuable. In cases where these conditions are met and where group of companies are involved, the question regarding which company shall be responsible must be evaluated separately.
As it is clearly seen in the FCPA Guidelines, parent companies may be held liable for their subsidiaries’ FCPA violations. Such may firstly occur where the parent company directly contributes to the subsidiary’s corrupt activities, or directs, or instructs the subsidiary to act corruptly. Secondly, the parent company may be held responsible within the framework of agency principles. To that end, the U.S. Securities and Exchange Commission (“SEC”) examines the parent company’s control mechanism over its subsidiary. In cases where the parent company has knowledge about its subsidiaries’ activities, the parent company may also bear criminal and legal liability within the scope of the FCPA.
However, there is no clear regulation as to when the parent company shall be deemed to have knowledge of its subsidiaries’ activities, as only certain sample criteria are used. The concept of having knowledge is used in a wide-ranging scope, as in the case of other provisions of the FCPA. As a matter of fact, it is accepted that the parent company has knowledge of the corrupt practice if the parent company knows that a bribe will be given, has a strong opinion on this issue, or is aware of a high possibility. What constitutes as having knowledge was assessed in detail in the case of Frederick Bourke, where Bourke was held liable within the scope of the FCPA for bribery and corrupted activities of the company in which he invested in Azerbaijan. Although Bourke was not actually aware of the bribery, it was decided that he had knowledge of the crime, as he had insisted on not revealing the truth and ignored serious indications. A very similar approach is also used when assessing the parent companies’ knowledge with regards to its subsidiaries’ actions, as observed in the sample cases.
For instance, in the case of United Industrial, the SEC concluded that the parent company had sufficient knowledge and control of its subsidiary’s actions to be liable under the FCPA due to reasons, in that the subsidiary’s president reported directly to the CEO of the parent issuer, the parent company’s legal department approved of the retention of the third-party agent through which the bribes were arranged and, despite a lack of documented due diligence, an officer of the parent company approved one of the payments to the third-party agent.
Similarly, in 2012, Tyco International Ltd. (“Tyco”), a company of Swiss origin and listed on the New York Stock Exchange, agreed to pay fines to the U.S. authorities for violations of the FCPA by its Florida-based subsidiary TEM / A-COM, Inc. (“TEMACOM”), along with other subsidiaries in China, Germany, Thailand and France. In this case, with the knowledge of TEMACOM employees, foreign officials were bribed through the sales representative and therefore, whether the parent company Tyco was responsible was also analyzed. In this context, the SEC concluded that Tyco controlled TEMACOM due to various reasons, such as four senior executives of Tyco, the parent company, were also TEMACOM officials, and one of the Tyco executives was a board member of TEMACOM. In this context, it was claimed that the relevant officials acted as Tyco’s agents within the framework of the corporate structure of the companies and that Tyco was, therefore, accountable for the violation, even if it was unaware of the mentioned illegal actions.
Accordingly, in a case against PTC Inc. (“PTC”), which concerned violations of provisions of the FCPA by the PTC, the SEC evaluated improper payments made to Chinese government officials by two wholly-owned PTC subsidiaries (collectively, “PTC-China”). The SEC argued that PTC China made payments to third party agents, disguised as commission payments or sub-contracting fees, which were then used to pay for non-business-related foreign travel for Chinese government officials, and allowed its sales staff to provide Chinese government officials with gifts and excessive entertainment. The SEC concluded that PTC exercised substantial control over PTC-China after evaluating several factors. Firstly, the PTC-China employees did not have an independent management structure, but had global functional reporting lines to the PTC, which allowed the PTC the control over PTC-China’s activities. Secondly, PTC-China’s senior sales staff reported to a Division Vice President of Sales, who was a PTC employee based in China. For sales operations and global services, various PTC-China employees reported to PTC employees, both based in China and in the United States. Finally, the PTC set the business and financial goals for its subsidiaries, including PTC-China, and provided a budget for allocation amongst its various subsidiaries. To that end, the SEC concluded that under applicable agency principles, PTC-China and its employees acted as agents and for the benefit of the PTC during the relevant time, when participating in the bribery scheme.
Pursuant to the FCPA, parent companies can be held accountable, directly or indirectly, for their subsidiaries’ actions resulting in a violation. In this context, the parent company may be directly responsible where it gives instructions for activities that involve violation. However, even if the parent company does not give the instructions regarding the act of the infringement itself, indirect responsibility of the parent company may arise in cases where it has a certain control mechanism over the subsidiary and, therefore, is aware of the subsidiaries’ activities and actions. While evaluating whether the parent company has a control mechanism, factors such as having directors in dual positions and intertwined reporting lines are considered. While examining whether the parent company has knowledge regarding its subsidiary’s actions, factors such as whether the possibilities of corruption were ignored, and whether adequate due diligence processes were adopted, are examined, rather than real and objective information.